"Two more years of above-trend Irish economic growth are in prospect for 2019 and 2020 with Ireland remaining among the countries with the best GDP growth potential over the next five-year time horizon."
2019 looks certain to be a turning point for monetary policy in the Eurozone, which in turn will have implications for the commercial real estate sector considering the intrinsic link between interest rates, Government bonds and real estate returns.
Interest rate hikes will move onto the ‘watch list’ in the second half of 2019. However, with less leverage being used by buyers and more institutional investment in the Irish market than in previous cycles, the market is arguably less susceptible to interest rate movements than at any time in the past. In any event, when interest rate rises eventually start to materialise in the Eurozone, increases are likely to be marginal. Therefore, even though the considerable arbitrage between property returns and Government bonds, which has sustained the market for many years now, will be eroded somewhat, real estate investment will remain compelling.
Investors will increasingly seek to deploy into sectors that have capacity to generate stable long-term income, something that is in Ireland’s favour. The fact that investment opportunities in Ireland are attractively priced relative to other European locations at this juncture also bodes well.
It is difficult to generalise across sectors, but we believe that there is potential for some yield compression in 2019 in various sectors of the Irish market, most notably prime offices, prime Build-to-Rent, hotels and industrial. This is at odds with many other locations in Europe where yield compression is unlikely at this point in the cycle. In contrast, the thinner pool of buyers for secondary retail assets could impact liquidity and therefore lead to some further yield softening for some retail assets in the Irish market over the course of this year.
New development in the Irish market over the last number of years has been very well controlled. It will be increasingly important to monitor the extent to which the pipeline expands throughout 2019 as the cycle matures further. A controlled development response should support further rental growth in some sectors in 2019. The best rental growth is likely to be achieved in the residential and industrial markets, with these sectors remaining fundamentally undersupplied.
Considering the volume of outstanding requirements for office accommodation in Dublin at this juncture, office take-up in the Irish capital is on course for another strong performance this year with supply expected to remain tight despite the volume of new construction underway.
Technology will continue to be prominent this year, both as a direct source of demand and also as a driver of the accelerating shift towards agile workplace strategies and demand for tech-enabled and SMART buildings. As the move towards flexible working escalates even further, we expect to see increased focus on office space utilisation. One of the key trends for 2018 will be the extent to which office leasing activity spills over into new and emerging districts of the capital, boosting areas such as Dublin 8.
The two sectors of the retail market that are most insulated from structural changes in consumer behaviour in the medium term are large experiential retail schemes with a food & beverage and leisure offering and convenient local assets. The challenge for retailers, landlords and developers is to make retail schemes more experiential and more defensive against changes in consumer preferences whilst at the same time having the most efficient and complementary omnichannel offering.
Demand in the industrial & logistics sector this year is expected to primarily emanate from companies involved in E-commerce, logistics, pharmaceuticals and food manufacturing while we also expect to see continued strong appetite for zoned land for data centre use in 2019. Brexit-related demand is expected to increase as companies attempt to streamline and adapt their supply chains, with some UK-based E-commerce occupiers expected to take a physical presence in Ireland for the first time this year. Prime industrial rents are expected to increase by as much as 6.5% over the course of 2019 as a result.
We expect to see continued evolution of the Build-to-Rent sector in the Irish market during 2019 with an increase in transaction volumes anticipated not least because some developers will look to de-risk schemes considering the weaker backdrop for traditional house sales. A lack of standing stock will lead to the emergence of forward funding transactions in this sector over the next 12 months and we may also see some portfolio trades as investors strive to get a foothold in this new and emerging specialist sector. As an increasing proportion of the population move towards rental as a form of tenure, local authorities, planners and other stakeholders need to gain a better understanding of the characteristics of the Build-to-Rent model. We expect to see an increase in planning applications for co-living concepts over the next 12 months.
Stabilisation in residential land prices
We see price stabilisation occurring in residential land prices in 2019 following the strong growth witnessed in the last number of years, particularly considering the extent to which house price inflation has eased in the Irish market over the last 12 months. The big focus for 2019 will be on securing planning permission, the provision of services & infrastructure and ultimately commencing development on the many sites traded during 2017/2018.
The volume of hotel sales in Ireland in 2019 is expected to be broadly similar to last year, albeit with limited portfolio transactions. In addition to steady activity in the provincial markets, we expect to see some high-profile Dublin hotels being offered for sale over the next 12 months. Strong pricing is likely to be achieved for city centre assets in particular, considering the growing international buyer pool targeting opportunities in this market. Meanwhile, we expect to see up to 30 Dublin pubs coming to the market this year.
The issues that are likely to be particularly topical in the Irish commercial property market this year are competitiveness, flexibility, affordability, viability and deliverability. Capacity constraints and construction price inflation will dominate the agenda. The issue of sustainability will also become increasingly topical over the course of the next 12 months as occupiers increasingly make efforts to cut running costs as well as striving to meet stringent sustainability and CSR requirements.
Digital transformation will continue to disrupt the real estate sector in 2019 and beyond. Institutional owners, occupiers and investors will increasingly implement blockchain technology in their operations and processes to increase efficiencies while new technologies such as Artificial Intelligence, voice-assisted devices and augmented reality will increasingly disrupt the sector.
Outlook 2019 Report
The CBRE Ireland Real Estate Market Outlook 2019 report provides insight on the key trends our experts think will affect the Irish property industry over the next 12 months.
read the full report here